Skincare company DERMAdoctor Inc. is known for anti-aging, blemish-reducing products with snazzy names like “Ain’t Misbehavin’” and “Poetry in Lotion,” sold at popular U.S. beauty stores like Sephora and Ulta Beauty.

The Kansas City, Mo.-based company, founded and run by a husband-and-wife doctor duo, plans an initial public offering for July 18, according to market intelligence firm Ipreo. DERMAdoctor is expected to trade under the ticker “DDOC” and price at around $5 per share, with estimated net proceeds of nearly $11 million.

The skincare market is a large-and-growing, lucrative business and the DERMAdoctor offering could be an appealing way for investors to buy into the space. But proceed with caution, say many analysts. DERMAdoctor has a history of financial losses. In fact, an independent accounting firm raised “substantial doubt” about its ability to stay in business for the next year.

The company began in 1998 as an online retailer, selling third-party beauty and skincare products, and experience in that area led to making its own products beginning in 2003.

Since then, DERMAdoctor’s offerings — which range from a $22 antiperspirant to a $95 vitamin C product — have been featured by glossy magazines and media outlets, often alongside dermatologist founder Dr. Audrey Kunin, whose cartoon image adorns DERMAdoctor’s products.

But the products themselves are also open to certain risks. The claims that DERMAdoctor has made about some of its offerings attracted the Federal Trade Commission’s attention. A 2014 judgment found that the company had been making false or unsubstantiated claims, including ones that misrepresented the existence and/or results of studies.

Here are five things to know before IPO:

Buzzy products, but are they unique?

At least one cosmetic dermatologist has favorites among the DERMAdoctor lineup, recommending certain of its over-the-counter products to patients, but questioning whether other products deliver noticeable results.

For example, keratosis pilaris is a common genetic skin condition that sounds worse than it is. Those who have it report a rough feel and tiny bumps on their upper arms, thighs and occasionally on the face. DERMAdoctor’s KP Duty line is “just a great product for that [condition], quite effective,” said Dr. Suneel Chilukuri, who is based in Houston, Texas. He recommends the KP Duty moisturizing therapy, body scrub and body peel pads to patients.

DERMAdoctor investor presentation

A dermatologist calls DERMAdoctor’s KP Duty line “the real heroes” of the company’s offerings, and says he recommends them to his patients.

Total NonScents, a “ultra-gentle antiperspirant,” could be helpful for individuals with super-sensitive skin, Dr. Chilukuri added, while describing the company’s “Wrinkle Revenge” line as “just okay.”

But he isn’t as impressed by the brand’s other products, including a vitamin C line, “Kakadu C,” which he said is a lot like other over-the-counter products.

And DERMAdoctor’s products that contain hyaluronic acid, supposed to help hydrate skin, has the same affliction as many such topical products, he said: “It really doesn’t penetrate the skin and it evaporates within an hour-and-a-half to two hours. It’s not really doing much of anything.”

‘Substantial doubt’ about ability to continue

An investor presentation for DERMAdoctor touts the company’s rapid growth. About 30 products brought in nearly $9 million in revenue last year, and nearly 30% of the year’s net sales came from products launched in the last three years.

Yet the risks laid out in the company’s prospectus paint a very different financial portrait.

After looking at DERMAdoctor’s balance sheets from 2016 and 2017, independent auditors expressed concerns. Recurring losses, plus negative cash flows, raised “substantial doubt” about whether the company can continue going for the next year, their report found.

And even though DERMAdoctor had reduced its net loss — from a loss of about $2 million in 2016 to a loss of $456,000 last year — cash from operations won’t be enough to fund it for the year, the company’s management acknowledged.

Of course, DERMAdoctor is searching for additional financing, including through the IPO. It plans to use proceeds from the offering largely to expand product development and marketing and buy more inventory.

In spite of this variety, four retailers made up a majority of its business last year, or a whopping 66% of revenue from operations in the latest quarter. As of the end of March, two major customers made up 100% of DERMAdoctor’s accounts receivable.

Changes in these retail relationships, which can be terminated at will, thus “would likely reduce our liquidity and profitability,” according to the company’s prospectus. DERMAdoctor also doesn’t have long-term contracts with any of its retailers.

Tangles with the FTC

In recent years, the Federal Trade Commission brought a complaint against DERMAdoctor, saying that it used unproven claims to market a facial lotion, eye lotion and “weight loss” lotion.

The company claimed that its “photodynamic therapy facial lotion,” priced at $85 for a one-ounce bottle, had anti-aging effects on the skin, but the company didn’t have clinical evidence in support, according to the settlement.

The FTC came to similar findings for DERMAdoctor’s allegedly anti-aging “photodynamic therapy eye lotion” ($65 for a half-ounce bottle) and its “Shrinking Beauty” lotion ($58 for a 5.5-ounce tube), advertised as being able to slim and tone the body, similar to the capability of lobsters (yes, as in the colorful crustacean). The FTC has been clear that skin products haven’t been proven to bring about weight loss.

“Consumers have suffered and will continue to suffer substantial injury as a result of Defendants’ violations of the FTC Act,” the FTC claim said. “In addition, Defendants have been unjustly enriched as a result of their unlawful acts or practices.”

The 2014 settlement requires, among other things, that the company have scientific evidence to support any future claims. DERMAdoctor appears to have complied: It still sells all three products but markets them differently, including a disclaimer that the “Shrinking Beauty” lotion is “not intended for weight loss.”

Still, regulatory concerns could still persist, the company’s prospectus noted. DERMAdoctor employs testimonials from customers and “before and after” photos to sell its products, but the strategy might be considered marketing using atypical results by the FTC, which is prohibited.

Regulators also often require that marketing claims have “reasonable” support, which can range widely, according to the prospectus.

Skin-care: a growing but competitive business

Skin-care is a major business, both in the U.S. and globally. Even big companies have noticed, with Unilever UL, +0.68%
recently making a big investment in the space.

With that, though, comes competition. DERMAdoctor is vying against large national and international companies with deep pockets, like Johnson & Johnson Inc.
JNJ, +0.78%
, L’Oréal Group
OR, +0.98%
and The Proctor & Gamble Company
PG, +0.77%
, along with prestige brands also sold at trendy stores, like Estee Lauder Cos.’ Clinique
EL, +0.98%
, privately-held Dr. Brandt and privately-held Kate Somerville.

“The skincare industry is highly competitive and subject to rapid changes due to consumer preferences and industry trends,” DERMAdoctor’s prospectus noted. “We must compete with a high volume of new product introductions and existing products by diverse companies across several different distribution channels.”

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